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institutional traders such as pension funds, banks, brokerage firms, mutual fund companies, and hedge funds (you
Institutional investors have access to billions of dollars, and they can influence not only the price of individual stocks but the entire market.
It is estimated that professional traders make up approximately 90 percent of the daily volume of the market, with retail investors making up the other 10 percent.
When you hear people talk about “the market,” they are usually referring to the Dow Jones Industrial Average (DJIA), which includes 30 large, well-known U.S. companies.
Although the Dow (operated by the Wall Street Journal) was the first index to keep track of stocks, hundreds of other indexes have been created to track
The next most popular index (after the Dow) is the S&P 500, primarily because it is representative of the entire U.S. stock market.
If you guessed that this index contains 500 stocks, you are right. These are 500 stocks that have the largest market capitalization.
Industrial Average, which is price-weighted, each stock in the S&P 500 index is assigned a weighting based on its total market capitalization. Note: I’ll ...
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The next most popular index is the Nasdaq Composite Index, which tracks all the stocks traded on the Nasdaq exchange (more than 3,000). Whenever you see the Dow liste...
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Other popular indexes are the Russell 2000 index and the Wilshire 5000. Y...
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If you were a professional money manager, your goal each year would be to beat the major indexes. What does this mean? It means that if the Dow is up 15 percent this year, you would have to earn 15 percent or more. (Your year-end bonus depends on it.) The bad news is that it’s very hard for people, even professional investors, to beat the indexes. In fact, it’s reported that more than 80 percent of the professional managers do not beat the indexes each year. In some years, only 15 or 20 percent
500 index, and in some stock categories (such as international stock funds), even fewer beat the indexes. It is safe to say that most professional
You can look at this statistic in three ways. First, if a professional investor can’t beat the indexes, then what are your chances? Second, you might
If your stock price went from $20 per share to $25 per share, your stock went up 5 points. That’s the same as $5 per share. That’s how
Question from a reader: What happens if no one wants to buy my stock? Answer: This is actually a great question. It’s like
market maker or specialist; in other words, there will
Important: Bull and bear markets are part of a market cycle. The market can’t keep going up forever, nor will it go down forever. But in the past, bear markets have been relatively short (no longer than a year), while bull markets can last as long as three or four years. Unfortunately, every bull and bear market is different, so it’s hard to predict exactly how long one may last.
During many bull markets, investors think that the good times will last forever. You know it’s a bull market when negative news is ignored, and the market goes higher. Investors continue buying stocks based on the fear of missing out on a continued rally. Stock prices keep rising and the market seems unstoppable.
Sometimes the market goes through a period of several months (or longer) when it keeps going down. That has happened a number of times in the history of the stock market. When the stock market is officially in a bear market (the market decline is more than 20 percent), it means that the major market indexes—the Dow, Nasdaq, and S&P 500—are plunging. People may panic and sell their stocks for whatever price they can get. Others may hold on, trapped and confused about what to do next. In general, the economy is weak, and corporate earnings are declining.
major brokerages stop hiring or they lay off employees. Even when a company releases positive news, in a bear market stocks might remain unchanged or even drop in price.
Since the stock market often predicts what will happen to the economy,
market may signal that a recession is coming or has already arrived. No one can predict how long a bear market will l...
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Note: A market correction, on the other hand, occurs when the market plunges, but less than 20 percent.
One of the longest sideways markets occurred after the 1929 stock market crash. After reaching a low in 1932, it took another 22 years for the market to return to its 1929
high of 381 for the Dow (and that is not a typo).
During a sideways market, neither the bulls nor bears make money (although short-term traders can find opportunities). In fact, it takes a lot of patience to invest during a si...
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30.) These 30 stocks are a cross section of the most important industrial sectors in the stock market. (A sector is a group of companies in the same industry, such as technology, utilities, energy, biomedical,
The Dow is a price-weighted index, which means that stocks with a higher weighting affect the Dow index more than stocks with a lower weighting. For example, since IBM is weighted high in today’s market (because of its high stock price), when this stock is having a bad day and falls
Examples of stock sectors include airlines, software, chemicals, oil, retail,
automobiles, and pharmaceuticals. Understanding sectors is important if you want to make money in the stock market. The reason is simple: No matter how
no matter what the condition of the economy, there are always sectors that are doing well and sectors that are struggling. For example, during bear markets, the computer and technology sectors and anything rel...
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Many pros shift their money out of the weak sectors and move into “recession-proof” sectors such as food, pharmaceuticals, beverages, and household goods (i.e., consumer staples). Even in a recession, pe...
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goods such as tissue and to...
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Classifying Stocks by Earnings Growth In addition to identifying stocks by sectors, you can also classify stocks by how much their earnings have grown in the past, and thus are expected to grow in the future. The three main types of stocks are value, income, and growth. Value Stocks: Stocks That Sell for Less than They’re Worth
Value stocks are shares of companies that are selling at a reasonable price compared with their
Value stocks are often those of old-fashioned companies, such as insurance companies, retail stores, and certain banks, that are likely to increase in price in the future. It takes a lot of research to find a company whose price is a bargain compared to its value. Investors
Income Stocks: A Conservative Way to Make Money Income stocks include shares of corporations that give money back to shareholders in the form of
reduce the loss if the stock price goes down. Income stocks can be in any sector, but typically they are in industries such as energy, utilities, and natural resources.
There are also a few disadvantages to buying income stocks. First, dividends are considered taxable income, so you have to report the income to the IRS. Second, if the company doesn’t raise its dividend each year—and many don’t—inflation can cut into your returns. Finally, income stocks can fall, even if not as quickly as other stocks. Just
Sometimes, the price of growth stocks can be extremely high with a high price-to-earnings ratio (P/E), especially when the company’s earnings
aren’t spectacular.
Because growth stocks can be volatile, they can be risky investments. These are ideal for short-term traders who want to play for a quick profit, or for long-term investors who believe in the company and its business model. The volatility, however, is unnerving for many.
The market capitalization (or market cap) of a stock tells you how large the corporation is.
to mid-cap stocks (those of medium-sized corporations
others invest in small-cap or microcap stocks (those of small corporations worth between $300 million and
Some investors prefer nimble small-cap stocks because there is a better chance that they will double or triple in value. On the other hand, smaller-cap stocks come with a higher risk that the business will fail.
stock in very small companies is an example of taking more risk
Outstanding shares are the total number of shares that a corporation has issued. This also includes shares
company insiders and officers. It’s
by diversification, so instead of betting your entire portfolio on one or two stocks, you spread the risk by investing in a variety of securities. (A portfolio is made up of securities, including
